When President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, many of the provisions were only temporary. Without a new bill, the provisions enacted in the Jobs and Growth Tax Relief Reconciliation Act of 2001 will again become effective after 2004.

Child Tax Credit

• For 2004, the child tax credit remains at $1,000. For 2005-2008, the credit falls to $700.
• You must claim a qualifying child as a dependent to claim the credit.
• The qualifying child must not have reached age 17 by December 31.

Marriage Penalty Relief

• For 2004, the standard deduction for married couple remains twice the amount of the standard deduction for single taxpayers.
• In 2005, the standard deduction for married taxpayers will fall to 174% of the standard for single taxpayers, then gradually rise to double the amount by 2009.
• For 2004, the 15% tax bracket will be twice that for joint fliers as it is for single filers.
• After 2004, the a5% tax bracket falls to 180% of the maximum taxable income in the same bracket for unmarried individuals, as adjusted for inflation.

Standard Deduction Amount Increased

The standard deduction for taxpayers who do not itemize deductions on Schedule A of form 1040 is, in most cases, higher for 2004 that it was for 2003. The amount depends on your filing status, whether you are age 65 or older or blind, and whether another taxpayer can claim you as an exemption.

The basic standard deduction amounts for 2004 are:

• Head of household - $7,150
• Married taxpayers filing jointly and qualifying widow(er)s - $9,700
• Married taxpayers filing separately - $4,850
• Single - $4,850

Personal Exemption Amount Increased

The amount you can deduct for each exemption has increased to $3,100 in 2004. You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phase-out begins depends on your filing status. For 2004, the phase-out begins at:

• $107,025 for married persons filing separately;
• $142,700 for single individuals;
• $178,350 for heads of households;
• $214,050 for married persons filing jointly and qualified widow(er)s with dependent children.

Tax Brackets

•  Income levels for the 10% tax bracket are increased to $7,150 for single taxpayers, and to $14,300 for joint filers for 2004.

•  The old thresholds of $6,000 and $12,000 will reappear in 2005.

•  The tax rates for 2004 remain at 10, 15, 25, 28, 33 and 35% for individuals.

Meal Expenses When Subject to “Hours of Service” Limits

Generally, you can deduct only 50% of your business-related meal expenses while traveling away from your tax home for business purposes. You can deduct a higher percentage if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. You are limited to 70% of 2004.

Education Expenses

Distributions from privately-sponsored Qualified Tuition Programs (QTPs) maybe tax-free beginning in 2004. You can exclude from income a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) if the amount distributed pay for qualified education expenses.

Beginning in 200, the amount of qualified education expenses you can take into account in figuring your tuition and fees deduction increases from $3,000 to $4,000 if your modified adjusted gross income (MAGI) is not more than $65,000 ($130,000 if you are married filing jointly).

If your MAGI is more than $65,000 ($130,000 if you are married filing jointly), your maximum tuition and fees deduction will be $2,000. No tuition and fees deduction is allowed if your MAGI is more than $80,000 ($160,000 if you are married filing jointly).

Standard Mileage Rates

For tax years beginning in 2004, the allowable deductions for the standard mileage rate are as follows:

• Business miles – The standard mileage rate for the cost of operating your car increases to 37.5 cents a mile for all business miles driven.
• Medical – The standard mileage rate allowed for use of your car for medical reasons is 14 cents a mile
• Moving – The standard mileage rate for determining moving expenses is 14 cents a mile.
• Charitable – The standard mileage rate for determining charitable contributions deductions is 14 cents a mile.

Capital Gains Rates

• The maximum tax rate for adjusted net capital gains remains at 15%.
• The rate for lower income taxpayers remains at 5%. The lower rates apply for both regular tax and alternative minimum tax purposes.
• These rates are effective for sales and exchanges of assets held one year or more taking place on or after May 6, 2003, and through December 31, 2007.
• The lower rates also apply to installment payments received on or after May 6, 2003.
• The 15% rate continues in 2008. In 2008, the 5% rate for lower income taxpayers drops to 0% but only for 2008.
• On January 1, 2009, the 10% and 20% rates are reinstated.
• The maximum rate for long-term gains from the sale of some assets, such as collectibles and the excluded gain on the sale of small business stock remains at 28%.
• The portion of the gain due to depreciation claimed on rental or business property remains at the maximum 25%rate.

Alternative Minimum Tax (AMT)

•  For 2004, the AMT exemption amount increases to $58,000 for married taxpayers and to $40,250 for unmarried taxpayers.

•  The exemption amount for estates and trusts remains at $22,500.

Section 179 Expensing

• For 2004, taxpayers can expense up to $102,000 in property purchase for business use.
• For 2003-2005, off –the-shelf computer software is eligible for expensing under §179.
• Unless §179 is further amended for years after 2004, these provisions will revert to prior law. This means that off-the-shelf computer software will no longer be eligible for expensing and taxpayers will no linger be able to revoke the §179 election without IRS consent.

Bonus Depreciation

• The 50% bonus depreciation applies for qualifying property placed in service after May 5, 2003 and before January 1, 2005. Qualifying property must be brand new property with class life of 20 years or less.
• The bonus depreciation amount that may be taken with respect to passenger automobile is $7,650.
• The bonus depreciation is not an alternative minimum tax adjustment.
• The adjusted basis of property acquired in a like-kind exchange or involuntary conversion is also eligible for the additional first-year depreciation.

Taxation of Dividends

• Dividends received by an individual shareholder from a domestic or qualified foreign corporation are taxed in the same manner as capital gain income. This translates to 15% for most taxpayers and 5% taxpayers at lower income levels. This applies for both regular tax and alternative minimum tax.
• This provision is temporary, expiring on December 31, 2008.
• The 5% rate terminates on December 31, 2007 and falls to 0% for 2008. this one-year break only applies to taxpayers in the 10% and 15% tax brackets.
• Certain types of dividends are specifically excluded from the definition of “qualified dividend income” for purposes of the new law.

Some of these include:

•  Dividends paid from a corporation exempt from tax.

•  Dividends paid on deposits in a mutual savings bank, credit union, savings and loan, etc.

•  Dividends paid on stock held in an ESOP.

•  Dividends that fail to meet the revised holding period.

•  Dividends treated as investment income (if the taxpayer elects) for purposes of the limits for the investment interest deduction. What this means is that you will not be allowed both benefit of the lower tax rates and the treatment of this dividend income as net investment income for purposes of deducting investment interest.

This brochure contains general information for taxpayers. As each tax situation may be different, this information should not me relied upon as your sole source of authority. Please seek professional advice for all tax situations.

#865 - © Copyright 2004

National Association of Tax Professionals

P.O. Box 8002

Appleton, WI 54912-8002

www.natptax.com